Guest written by our friends at LoansCanada.
Is Perfect Credit Necessary?
Getting by without credit is rare for most people these days, especially in Canada, where credit cards and loans are two of the main ways that people deal with unexpected costs and sometimes even day to day expenses. So, when it comes to the health of your credit, is good credit enough? Or should we all be striving for perfect credit?
Check out these five healthy credit boosting tips.
What Are Your Credit Score and Credit Report?
In the world of credit, your credit score and credit report are important when you’re trying to get approved for most credit products, such as installment loans, lines of credit, and mortgages. That’s because both elements showcase your ability as a credit user.
When your first credit product gets activated, your creditor will send your information to either one or both of Canada’s major credit bureaus; Equifax and TransUnion. Typically, both bureaus will have a slightly different version of your credit score and credit report on file. When you apply for a new credit product, your lender may ask to pull your credit as a way of calculating your creditworthiness.
Your Credit Score
A three-digit number ranging from 300-900, your credit score is one of the first things that any potential lender will look at when considering you for new credit. Like a grade-point-average, your score is a basic way of depicting your credit health. Every good credit action you make will elevate your credit score, leading to all sorts of possibilities and benefits down the line. The further your score climbs toward 900, the better your approval results will be.
Your Credit Report
In many ways, your credit report is even more important than your credit score. That’s because your report is a detailed file that contains a history of all your credit usage spanning over a predetermined number of years. Essentially, if your score is like your grade-point-average, then your credit report is like your report card.
Although your credit score gives a lender a simplified look at your creditworthiness, your report is used to get a detailed picture of the way you have handled credit in the past and the way you might handle it in the future. Your report also details your status of residency, social insurance number, and other kinds of personal information. For the best approval results and interest rates, it’s best to have a clean and healthy-looking credit report.
Why Good Credit is Important
Generally speaking, good credit qualifies as having a credit score that falls somewhere between 700 and 900, although it’s important to keep in mind that what passes as good credit will vary from lender to lender. A good credit score implies that you have been and will continue to be responsible with all your active credit accounts. Good credit is also important because:
- Less risk is imposed on the lender, so you’ll be more likely to qualify for a lower interest rate. The lower your interest rate is, the more money you’ll effectively be saving over time.
- Good credit means you are responsible and gives you the best chance at being approved for any credit product.
Is Perfect Credit Necessary?
Having perfect credit, often represented as having a credit score above 800, is a surefire way of getting approved for any credit product on the market and saving money on interest. However, whether perfect credit is necessary really depends on what kind of credit product you’re applying for, how much credit you’re requesting, and the type of lender you’re applying with.
For example, if you plan to apply for a mortgage through your bank, your credit health would need to be next to perfect, because banks have high approval standards and a mortgage involves a significant amount of money. The more of a risk you pose as a client, the less likely they’ll be to approve you. On the other hand, applying for a small loan or traditional credit card poses far less risk, so perfect credit isn’t necessary.
All this said, there are plenty of other organizations that you can apply with if your credit is less-than-perfect, such as alternative, privately funded, and bad credit lending institutions. Just know that while your approval would be more likely with such places, your interest rate may be less affordable. This is one of the main reasons why all Canadian consumers should keep an eye on their credit and implement healthy financial habits so that they can build and nurture a good credit score.
Is Perfect Credit Worth Being in Debt?
The simple fact is, the more credit you use and the more loans you take on, the more opportunities you create to build and improve your credit. For those consumers who are looking to grow their credit, it is all too easy to become fixated on the idea of perfect credit. It’s important to keep in mind, while good or even great credit can help you achieve financial goals and creates opportunities, racking up excessive debt just to see a three-digit number rise, is not worth it.
Learn how to improve your credit score without increasing your debt, click here.
When All is Said and Done…
Perfect credit, while it may seem beneficial, is not necessary. In fact, it can be quite difficult to obtain “perfect” credit in the first place. So, if your credit score isn’t in the high 800’s, there’s no need to worry. Instead, aim to have healthy financial habits that lead to good credit.